Could Déjà Vu Spell Trouble for a Euro Zone Banking Union?

European leaders have made numerous strides recently to establish a Banking Union, but if the past is any indicator, their chances of succeeding might not be as good as hoped.

The European Commission tried in the 1960s to harmonize the banking systems in the then six-nation European Economic Community, a precursor to today’s European Union. The goal was two-fold, both to create a common market for banking and to get the ball rolling toward the single currency. “An integrated capital market with a single currency needed, in order to function properly, a harmonised financial regulatory and supervisory context,” wrote Emmanuel Mourlon-Druol, a French scholar now a fellow at the University of Glasgow in a recent blog post.

The scholar was in Frankfurt Friday to discuss his findings at a conference. He pointed out that the efforts back then weren’t as ambitious as the effort today. European authorities had no ambition for a common supervisor, for example, as the ECB is due to become later this year.

But Mr. Mourlon-Druol’s research remains highly relevant because some of the issues that led to the failure of the effort 40 years ago, are still with us.

Perhaps not surprisingly, it was the United Kingdom that played a key role in softening the Commission’s ambitions back then. They joined the then EEC in 1973. The UK “had no interest in doing things the Commission’s way,” he said Friday. (He points out, however, that Britain is not solely to blame for the collapse of the effort then. Rather, differences in the banking systems among the six countries in the original EEC also presented a challenge).

Though the young historian notes that the new Banking Union in the European Union has already gone further than its predecessor, he notes the “perennial issues” that are still with us today: Two primary issues are what to do about London: a major European financial market that is outside both the euro zone and the single supervisor, and the treatment of smaller banks, such as German Sparkassen.

The ECB will only directly supervise the euro zone’s largest banks, leaving out the Sparkassen. As Mr. Mourlon-Druol notes in his blog, the exclusion of Sparkassen from such harmonization efforts “has been the constant bargaining position of the German government ever since the 1960s. It was already an issue in the discussions of the 1960s and 1970s about the harmonisation of banking regulation and supervision.”

The German government also fought hard in recent negotiations over the Banking Union to keep the Sparkassen outside the realm of ECB control. The U.K. has also announced that it won’t participate in the current ECB-based supervision scheme, known as the SSM.

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